Beyond Traditional Drugs: Investments In Stem Cell, Medical Devices And Agent Administration

Includes: BSX, CLBS, ONCS
by: A. John Hodge

Looking beyond traditional pharmaceutical companies to alternative branches and ideas of medicine could provide an investor with new opportunities. There are many companies that are developing unique approaches and strategies to battle disease or tackle the unmet medical needs. Due diligence is required to sift through them, but the rewards of uncovering the company and associated stock that is successfully able to turn an idea into a marketable product or new technology could be substantial. This article will look at three companies from three different areas of medicine, each with the potential to become the future standard of care. Each company also bearing a certain amount of risk as they develop and grow.

Diverse Stem Cell Company

NeoStem (NBS) is a groundbreaking stem cell therapy company that is developing and building on its core competence in order to capitalize on the increasingly important role that stem cell therapy is expected to play in the treatment of chronic diseases. The company is running a state-of-the-art contract manufacturing business through its development and manufacturing subsidiary Progenitor Cell Therapy (PCT). The revenues being generated from this business help to offset the costs associated with the stem cell therapy product development program. The company's most clinically advanced product, AMR-001, is being developed by another subsidiary, Amorcyte. AMR-001 is a cell therapy used in the treatment of cardiovascular disease. Patient enrollment has commenced for a Phase II trial to investigate the treatment's effectiveness in preserving heart function after a heart attack. Other product development programs include collaboration between Becton-Dickinson and Athelos (80% owned by PCT), which is currently in the early pre-clinical stages of exploring a T-cell therapy for autoimmune conditions. Finally, there is the proprietary VSEL Technology platform and a mesenchymal stem cell product candidate for applications in regenerative medicine.

NeoStem recently announced that a new article in the International Scholarly Research Network has provided more positive data that AMR-001, NeoStem's lead product candidate, appears to be capable of preserving the function of heart muscle following a myocardial infarction. The study also shows that the function of preserving heart muscle is evident even earlier after treatment than has been previously shown. AMR-001's angiogenic and anti-apoptotic mechanisms of action appear to indicate that preservation of heart muscle function could start within weeks and be evident in less than six months. Just a few days prior to this, NeoStem had announced that data from its studies in collaboration with the University of Michigan School of Dentistry further expanded the potential of its proprietary regenerative cell therapy product, "VSELS" (very small embryonic-like stem cells), by demonstrating bone regeneration capabilities. The study, funded by the National Institute of Health (NIH), involved the isolation of G-CSF mobilized VSEL stem cells from the blood of healthy donors and transplanted them into holes made in the cranial bones of SCID mice. After three months, the implanted VSEL stem cells had differentiated into human bone tissue within the crania of mice. The company believes that these stem cells, of human bone marrow origin, would provide the benefits associated with embryonic stem cells without the associated moral dilemmas.

NeoStem CEO Robin Smith recently provided an update on the company's progress. She pointed out that the company has an exciting pipeline of promising cell therapy products, especially in the area of regenerative medicine, which currently have a market value of around $50 billion with an annual growth rate of 15%. The company has generated revenues in excess of $10 million each year from its contract manufacturing business. The company has received financial support totaling $3 million from the Department of Defense (DOD) and NIH for its development activity. An additional $13 million in grant applications are currently pending.

NeoStem is not a typical early stage development company because of the revenues from the PCT contract manufacturing business. The PCT business has worked with over 100 companies in supplying stem cells for clinical trials. Apart from the fee income that accrues, several of the trials are at an advanced stage and could lead to substantial royalty flows if the products are approved and successfully launched.

For the second quarter of 2012, NeoStem reported an operating loss of $6.81 million on revenues of $3.37 million. After accounting for an extraordinary loss net of tax of $13.35 million, the net loss attributable to common shareholders was $20.59 million. As of June 30th, 2012, cash and cash equivalents stood at $2.11 million, while total current assets were $52.25 million. The company's financial position is satisfactory when compared to the net cash outflow of $3.61 million for the quarter. This is based on the assumption that the current assets can be realized in cash. Share Capital & APIC stood at $215.32 million, against which must be adjusted the accumulated loss of $168.97 million. These numbers are not out of line when compared to other early stage biotech companies, because you are investing on the basis of future growth prospects.

NeoStem is currently trading around $.71, between a 52-week range of $0.30 and $0.90. The company currently has a market cap of $108 million. The company is undervalued at current price levels based on a discounted cash flow model, and the fact that it will be presenting at several important conferences in the near future will give the company the opportunity to address more investors, which could result in significant upside momentum if the data in the presentations proves to be positive. I advise investors to perform additional research into NeoStem by looking at its current and potential financials, product line and stock chart before opening a position in this promising company.

A Diverse Medical Device Program Growing Through Acquisitions

Boston Scientific (NYSE:BSX) is one of the leading companies currently developing and producing minimally invasive and non-invasive products for the treatment of cancer as well as a number of other diseases. In its second quarter results, the company reported a 7% decrease in sales of $1.8 billion. The weak segments of its business were interventional cardiology" and "cardiac rhythm management", with reported currency basis changes down 16% and 10%, respectively. The company recorded a non-cash impairment charge of $3.4 billion on its EMEA reporting unit, and the full charge for the year, which has yet to be finalized, will be in the range of $3.1 billion to $3.7 billion. As a result, the GAAP loss for the quarter was $3.4 billion, or $2.39 per share. For the full year, sales are estimated at $7.2 billion to $7.4 billion, and losses will be in the range of $2.09 to $2.16 per share.

Boston Scientific's oncology product line continues to remain strong. The company recently launched products such as the Renegade HI-FLO Fathom microcatheter and guidewire system, and the Interlock - 35 Fibered IDC Occlusion System for peripheral embolization, both of which have been well received in the market. A number of new product launches for the rest of the year are expected to drive growth in sales and revenues. Medical technology and device companies take time to establish themselves. However, Boston Scientific has seen sales declines in its most significant business segments. The company's cardiac rhythm management (CRM) segment fell almost 10%, while drug-eluting stent sales fell 20%. Gross margins rose on a year-to-year basis, but I do not think these margins can be sustained in light of these sales declines. Even with this margin increase, net income declined by around 12%.

Boston Scientific had a favorable panel meeting for S-ICD, a subcutaneous ICD system that can cater to about one-third of the market with a much less invasive approach. This is promising but, given the track record of this company, it needs to win back market share from Medtronic (NYSE:MDT) and St. Jude (NYSE:STJ), otherwise it will end up cannibalizing its own ICD business. Unfortunately, Boston Scientific has not been particularly proactive. The company has been lagging behind its rivals, and this slow reaction has allowed its competitors to introduce upgrades to their products. Most of the company's best growth products have come from acquisitions. While there is nothing wrong with this, it speaks volumes about its internal research and development capabilities. For instance, the S-ICD came with Cameron Health. The Transcatheter heart valve came with Sadra, and the Alair bronchial thermoplasty product came with Asthmatx.

Boston Scientific is currently trading around $5.07, between a 52-week range of $4.79 and $6.41. While there is nothing wrong with Boston Scientific's products and product pipeline, its management has been significantly lacking in execution capabilities. Until there is more positive evidence of a more aggressive and successful strategy implementation, I will not recommend buying this stock at current levels but instead await a share price dip before taking positions for a long-term hold.

Novel Electroporation Therapy Administration Technology Garners Attention

U-T San Diego recently carried an article on San Diego-based biotech company OncoSec Medical (NASDAQ:ONCS), which is pioneering a non-invasive treatment for cancer that replaces resection (surgery) or chemotherapy. These traditional treatment methods are normally used to treat late stage skin cancer. The company is currently conducting Phase II clinical trials for an innovative therapy called Immunopulse, which catalyses the body's own immune response to destroy cancer cells. ImmunoPulse delivers short electrical pulses to the surface of a tumor, targeting the cancer cells directly and increasing the effectiveness of anti-cancer agents. The electrical current dramatically increases the porosity of cells in the targeted region, increasing their uptake potential (more on this below). This increased efficiency reduces the need to use larger drug dosages and thus reduces the incidence of toxicity and side effects. With $12 million in funding, the company is conducting simultaneous Phase II trials for ImmunoPulse in the treatment of metastatic melanoma, Merkel cell carcinoma and cutaneous T-Cell lymphoma. Although the latter are less common than many other forms of skin cancer, they can often be aggressive and resistant to drugs.

The administration of electrical current into the body is called electroporation. OncoSec Medical's proprietary platform, called OncoSec Medical System (OMS), is based on electroporation and is used in conjunction with either chemotherapy agents or immunotherapy agents to target and attack cancer. The company explains that conventional or traditional cancer treatment cannot distinguish between normal cells and cancer cells. This means that large dosages of the anti-cancer agent are required to effectively treat cancer cells. Electroporation uses electrical pulses to create temporary pores in the tumor through which the tumor can absorb the anti-cancer agent, which has already been injected directly into the site. Once the current is stopped, the pores reseal themselves and trap the anti-cancer agent inside the tumor. By increasing the porosity of the tumor, the effectiveness of certain therapies can be increased by a factor of up to 4,000 times. The OMS electroporation platform consists of a generator and applicator. The generator creates a pulsed electric field that temporarily increases the porosity of cell membranes within the field. The hand-held applicator provides a series of short-duration electrical pulses of a specified voltage through a series of probes. Acting together, the generator and the applicator create a rotating array of pulses that uniformly increase the porosity of the targeted cells.

The company is working on two separate approaches utilizing its OMS platform. The first is called ImmunoPulse, which uses the body's own immune system to destroy cancer cells. The OMS platform is used to deliver DNA IL-12 (a plasmid DNA construct with instructions to produce the IL-12 cytokine) into the electroporated cells. When the gene enters, it triggers the production of IL-12 cytokines, which in turn identifies it as a foreign entity to be targeted by the body's natural immune response. Cytokines are not considered to be viable anti-cancer therapy because of the toxic dosages required for effectiveness. However, cytokines delivered using DNA and the OMS platform has achieved effective results with a significantly reduced dosage, making this a viable treatment for both local and metastatic melanoma. Initial results suggest that gene therapy has the potential to not only treat cancer cells in the target area, but also to trigger immune responses affecting remote cancer cells. ImmunoPulse is currently being advanced in a Phase II confirmatory study, with enrollment at six centers throughout the U.S.

OncoSec Medical's second method of treatment is called NeoPulse. NeoPulse increases the effectiveness of a proven anti-cancer drug in killing cancer cells, while minimizing the toxic side effects. NeoPulse uses the OMS system to destroy cancer cells using smaller doses of bleomycin, a highly effective, but also highly toxic, anti-cancer drug. Bleomycin has traditionally been intravenously injected, and because cancer cells cannot be accurately targeted, high dosages must be used, and significant side effects are common. OncoSec Medical believes that delivering bleomycin through the OMS system can achieve effective results with 1/20th of the traditional dosage and that the ability of the drug to kill cancer cells is enhanced by a factor of as much as 4,000 times. Extensive pre-clinical and clinical data from phase 1 through phase 4 clinical trials have demonstrated that NeoPulse is safe and highly effective in eradicating solid tumors.

OncoSec Medical does not currently generate any revenue. The latest available results for the second quarter of 2012 show a loss attributable to common shareholders of $810,000. As of June 30th, cash and cash equivalents stood at $6.57 million, while Share Capital & APIC stood at $10.42 million. Accumulated losses as of that date were $4.61 million, while cash flow for the quarter was positive at $6.11 million due to the sale of stock worth $7.06 million. In order to protect its intellectual property, OncoSec announced that it has secured an exclusive license for specific patented technology from the University of South Florida Research Foundation (USFRF) relating to the delivery of gene-based therapeutics via intratumoral and intramuscular electroporation. This patent is directly related to the ongoing Phase II trials for metastatic melanoma, Merkel cell carcinoma and cutaneous T-cell lymphoma using the company's ImmunoPulse therapy, and extends patent protection for the ImmunoPulse technology to the year 2024.

OncoSec is not developing a drug. Instead it is developing a drug delivery system using already approved anti-cancer agents. Additionally, electroporation is a proven technology. The company is further hedging its bets by developing two treatments on the OMS platform. OncoSec Medical is currently trading around $0.40, between a 52-week range of $0.12 and $1.00. The company has recently seen a large uptick in volume and share price appreciation based on the release of clinical data on the company's Merkel cell carcinoma trial, which showed a positive response by those treated. Investor interest should continue to grow, as more data will be released on the larger more profitable market of metastatic melanoma later this year. The positive results of both safety and efficacy could propel the share price to new highs. I urge investors to perform addition research into OncoSec Medical today, but with any micro cap stock associated risk must be considered.

Disclosure: I am long BSX, NBS, ONCS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.